Economic And Financial Security: Gorbachev’s Perestroika and How the West Should Respond

Executive Summary

One of the most important security challenges now facing the West is the need to define and pursue a coherent and security-minded policy approach to Mikhail Gorbachev’s announced program to "restructure" the Soviet economy. Such a policy approach requires an accurate understanding of what perestroika is today. If it is other than the advertised wholesale reordering of the USSR’s economic priorities — if it entails less than a fundamental and irreversible reallocation of resources from the military to the civilian sectors, perestroika’s benefit to the United States and its allies will be greatly reduced. Indeed, under such circumstances, "economic restructuring" — with the help of Western governments, commercial banks, and businesses — will serve principally to make the Soviet Union an economically more dynamic and militarily stronger adversary.

This paper offers means for judging the true character of perestroika. It also makes recommendations for a coordinated alliance policy in light of the actual nature of Gorbachev’s present approach to "restructuring." These are designed to ensure that the West does not provide material assistance to the USSR in ways inimical to vital Western security interests. If implemented, they will also assure that such assistance as is provided helps to effect the kind of perestroika which advances genuine economic reform within the USSR and reduces the Soviet threat to the Free World.

Findings

• As currently configured, Gorbachev’s perestroika amounts to an attempt to have it all ways, without having to face hard choices in the area of resource allocation. The West is helping to finance simultaneously an expanding military budget, the maintenance of aggressive foreign activities and the resuscitation of the failed Soviet economy.

 

• Virtually all of the USSR’s annual hard currency earnings are required just to purchase imports from the West and to service its debt. Assuming Soviet earnings are earmarked for these two purposes, the West is — through undisciplined lending practices — unwittingly financing a large portion of the Soviet empire’s remaining hard currency requirements at a multibillion dollar annual cost to Western taxpayers in higher defense and foreign assistance spending.

 

• The creditworthiness of the USSR and Eastern Europe is a more complex calculation than most Western banks and companies realize. The role of annual hard currency earnings should assume primary importance in the credit decisions of Western banks, particularly at a time when Gorbachev wants hard currency earning enterprises and Ministries to become entirely "self-financing."

 

• Despite over two years of sustained, bipartisan Congressional efforts seeking high-level consultations with the allies on the national security dimensions of Western credit flows to the Soviet bloc and client states — including the passage of two, virtually unanimous Senate resolutions in the past six months — the United States has still not engaged in such discussions in any meaningful way.

 

• Similarly, the United States has not yet seriously begun the urgent task of developing a coordinated and security-minded Western response to the Soviet economic offensive toward the West and perestroika. The Toronto Economic Summit, some official representations to the contrary notwithstanding, did not fulfill this task.

Policy Recommendations

• The substantially increased Western leverage that accompanies Moscow’s urgent need for large-scale infusions of Western capital, technology, management, marketing skills and access to Western markets, should be used constructively to advance Western security goals, genuine economic reform within the USSR, and greater autonomy for Eastern Europe.

 

• The objective should be to change the direction of perestroika so that it means something that it does not today — a more benign, inward-looking and peaceful Soviet Union.

 

• The United States should take the following steps, in concert with its allies, aimed at "helping" the Soviets effect genuine reforms:
  • Promote full data disclosure for all Western financial flows to Warsaw Pact countries and Soviet client states, including historical data covering the period 1978 through 1988.

     

  • Terminate all Western government guaranteed loans to the USSR and other Warsaw Pact countries which, by definition, transfer the risk of any future Soviet debt rescheduling or default from the commercial banks involved to Western taxpayers and which artificially lower the interest rates on such loans.

     

  • Urgently pursue an Alliance policy on the security dimensions of credit flows and the phasing out of all forms of untied, general purpose lending (e.g., bonds, syndicated credits, other securities) on the basis that such sovereign lending is commercially unsound, and that the proceeds of untied credits can be more flexibly and economically diverted by the Soviets to fund activities inimical to vital Western security interests.

     

  • Toward this end, insist that the major security aspects of East-West economic and financial relations be placed on the formal agendas of both the OECD ministerial in April, 1989 and the Paris Economic Summit in May/June, 1989.

     

  • Oppose further debt rescheduling for Cuba, Nicaragua and other Soviet proxies so long as they are engaged in regional aggression, narco-terrorism, abuses of human rights or other misdeeds.

     

  • Resist providing any irreversible Western economic and financial benefits except in return for appropriate, irreversible steps on the part of Warsaw Pact countries and Soviet client states.

     

  • Oppose Soviet membership or observer status in major international economic and financial organizations such as the General Agreement on Tariffs and Trade, the IMF, the World Bank, and the Asian Development Bank.

     

  • Level the economic and financial playing field between Warsaw Pact countries and Latin American debtor nations so that potential adversaries cease to enjoy continued, preferential treatment (such as Western government-guaranteed credits, more favorable terms and conditions on loans and multilateral economic conferences) vis a vis that available to fledgling democracies in this hemisphere.

     

  • Improve U.S. government monitoring of and reporting on developments bearing critically on the economic and financial security portfolio of the United States, particularly those resulting from the activities of allied companies and banks (e.g., the Libyan chemical weapons facility).

     

  • Urge those doing business with the USSR to subscribe to established principles such as those advocated by former Soviet dissident Vladimir Slepak relating trade and financial practices to respect for human rights.

     

  • Require before-the-fact reporting of any planned Soviet or client state acquisitions or equity participation in U.S. entities, including banks.

     

  • Limit U.S. visas issued to individuals from "hostile" nations to an appropriate fraction of the counter-intelligence manpower and resources available to monitor their activities in this country.

 

 

• The portfolio of economic and financial security policy issues should be integrated into all major discussions between the Bush administration and the Congress — just as it should be featured those between the United States and its allies — in connection with upcoming consultations and decisions regarding alliance defense burden-sharing, the international debt crisis, and the U.S. budget deficit reduction.

The high stakes for Western security require that the new President and his team make the adoption of a more disciplined and prudent approach to economic and financial relations with the Soviet Bloc one of the first goals of the "comprehensive reassessment" of U.S. foreign and defense policy upon which they have just embarked.